Credit in America


Like anything else, it helps to be informed about your credit. While it might seem like you are getting a good deal, you need to make sure that you understand how the deal works before you sign any contracts. For instance, an advertisement for a card might promote 0% on balance transfers but what the ad doesn’t tell you is that the card has a 26% interest rate on new standard purchases. If you don’t pay attention, you could end up paying for more for what you thought you were going to save.

There are a couple of things to look for when trying to determine if something is a good deal or not. First of all, is there a balance transfer fee? Is there an annual fee? You need to ask yourself how the credit company is going to make money if they offer you such a low rate. Of course, what credit card companies do is perfectly legal. Unfortunately, it is also very sneaky.

Most of the time, if you find a good rate, there is also a good chance that it is an introductory, variable rate that will adjust over time. This is an incentive used to attract you to the card so that you will purchase heavy at the beginning of your ownership; a habit you could severely pay for later. For balance transfers, this works in your favor because you consolidate your debt to save money and it gives you a timeline within which to try and schedule your payments. If you can get your balance paid off before the 6, 9, or 12 month introductory period ends, you won’t have to pay extra for that balance.

Universal Default

This is a term that credit card companies and banks use to describe the probability that you will be able to make your payments. They use your previous behavior with other creditors to determine this factor; with figures and statements from not only other credit card companies but utility bills, phone bills, student and auto loans, etc. Using this probability, a credit card company could, potentially, select a higher interest rate simply because they believe that you might not make your payments on time.

While this sounds like a farce it is indeed very true, and in fact very common. While it might seem unfair for you to be judged on your past behaviors, especially since you are a much savvier and considerate consumer now, credit card companies are providing a service of convenience, and as such expect something similar in return. You can control this, of course, by being a responsible credit customer. Anticipate any setbacks and make arrangements before they become an issue. Communicate with your creditors regarding the concerns you might have. Negotiate whenever you feel it is appropriate.

Credit Card Reform

Last year in May, the Federal Reserve Bank met with both the Office of Thrift Supervision and the National Credit Union Administration to devise a plan for reforming credit card policies. They wanted to try to find a way to make credit card policies more accommodating to consumers, especially those who have been finding it more and more difficult to keep up with escalating rates.

One of the most important changes resulted in the extension of the grace period for corporate changes. If your credit card company wants to make changes to your account, which usually comes in the form of raising rates, they must provide for you a minimum of 45 days notification. Whether you missed a payment or are facing universal default, they must allow you that grace period so you can choose to stay or look for another company.

As you know, credit cards carry multiple balances, but what you don’t know is that in the past, credit card companies would take your payment and apply to whichever balance had the smallest percentage rate. This would keep your high-interest balances open the longest. Obviously this could lead to major issues, and it has, which is why new reform forces credit card companies to automatically apply all new payments to your higher balances first. The goal here is to ensure that the payments you make actually do help you to reduce your total credit liability. Furthermore, credit card companies are required to inform you of the total amount of time it will take for you to pay off your debt if you only make the minimum payment every month.

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